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How is the impact of power limit on the chemical industry

Recently, the Dual Control System of Total Energy Consumption and Energy Intensity has lit a Red Light in many provinces of China. The provinces named by the Ministry of Industry and Information Technology have taken measures to solve the energy consumption problem since there are only 4 months to the year’s end. Guangdong, Jiangsu, and other major chemical provinces made strict policies to limit using of electricity and limit production to thousands of enterprises. Why there are energy limits and production limits? What impacts will it have on China’s chemical industry?

Many provinces pull the plug, cut the power, and limit the production

Recently, many provinces such as Jiangsu, Guangdong, Yunnan, Qinghai, Ningxia, Henan, Chongqing, Guangxi, Sichuan, Inner Mongolia, Heilongjiang, and others started to carry out power control measures for dual-energy consumption to meet control targets. Electricity restriction measure has gradually spread from the central and western regions of China to the eastern Yangtze River Delta and Pearl River Delta, etc.

Henan: The electricity limit will be for more than three weeks for some processing enterprises

Sichuan: Suspension of non-necessary production load, lighting load, and office load.

Chongqing: Some factories cut power and stopped production in early August.

Inner Mongolia: The electricity price would be increased by not more than 10%.

Qinghai: An early warning of the power limit is announced, and the area of the power limit continues to expand.

Ningxia: The power for high-level energy-consuming enterprises will be limited for a month.

Shaanxi: The power limit will be extended to the end of the year. Yulin city will limit the production of dual high enterprises to the level of 50-60%,

Yunnan: Two rounds of power limit have been launched. The average monthly output of industrial silicon from September to December shall be limited to less than 10% of August output (i.e., 90% reduction); the average monthly output of yellow phosphorus shall be limited to 10% of August 2021 output (i.e., 90% reduction).

Guangxi: Guangxi has introduced new dual control measures, requiring enterprises with the production of electrolytic aluminum, aluminum oxide, steel, and cement to limit their production starting from September

Shandong: there is a power limit of 9 hours daily, mainly from 15:00-24:00, the shortcoming time continued to September, and the power limit measures would be implemented

Jiangsu: In early September, the Jiangsu Provincial Department of Industry and Information Technology carried out special energy conservation supervision for enterprises with more than 50,000 tons of standard coal annually. In the cluster area of printing and dyeing, more than 1,000 enterprises will produce for two days and stop production for two days.

Zhejiang: Production will be stopped for the key energy-consuming enterprises until September 30.

Anhui: There is a power shortage of 2.5 million kilowatts, and it is decided to start an orderly electricity consumption plan from September 22.

Guangdong: From September 16, the electricity plan work for two days and stopped for 5 days was implemented

Reasons for a power cut and production limit or shutdown

 

In essence, the power cut is due to the shortage of coal and power. The national coal output is almost the same in as 2019, but the power generation is increasing. The coal inventory of various power plants is significantly in recent years. The reasons behind the coal shortage are as follows:

1. In the early coal supply-side reform, open-air coal mines and some small coal mines with safety problems were closed. With good coal demand this year, the coal supply was quite tight.

2. The export is very good this year, and the electricity consumption from light industry enterprises and the low-end manufacturing industry is rising. But the power plants consume large amounts of coal. The high price of coal has increased the production cost of power plants, which makes power plants at a deficit.

3. The import of coal has changed from Australia to other countries. There is an increase in the import cost and global coal is also at a high price.

Following is a diagram oChina’sna coal output in recent years

Coal output

 

Why not expand the coal supply, but rather limit the power?

The total power generation in 2021 is not low. In the first half of the year, 20-year earnings generated 3,871.7 billion kilowatt-hours, which is twice that of the United States. Meanwhile, China’s export has increased extremely rapidly this year.

 

According to the data released by the General Administration of Customs, China’s total import and export of foreign trade reached 3.43 trillion yuan in August, up by 18.9% compared to 2020. And the positive growth has been last for 15 consecutive months in the first eight months of 2021, China’s total imports and exports reached 24.78 trillion yuan, up by 23.7% year on year and 22.8% over the same period in 2019.

 

The reason for the export increase is that affected by the epidemic, the production in many countries is not normal, so the production task in China increases. With the increase in export, the demand for raw materials also increased. The import of commodities products also soared. From the end of 2020, the increase in steel price is caused by the price increase of iron ore and iron fine powder which are imported from other countries. The main production means in the manufacturing industry are raw materials and electricity. With the production task increases, China’s electricity demand continues to increase. Why not expand the coal supply, but instead limit electricity? On the one hand, the demand for power generation is increasing, while the cost of power generation is also increasing. Since the beginning of 2021, the supply and demand of domestic coal continues to be tight. The price of thermal coal is high during the low season. Coal prices have risen sharply and maintained a high level. With the high price, the production and sales costs of power enterprises are seriously inverted. And the operating pressure of power enterprises is prominent. According to the data of CLP, the unit cost of standard coal for large power generation groups has increased by 50.5% year on year. But the electricity price has remained the same. The loss of coal power enterprises was significantly increased, and the whole industry is at the loss. It is estimated that the loss of every power generation will exceed 0.1 yuan for every 1 watt. And 100 million kilowatts will lose at least 10 million yuan. For large power generation enterprises, their monthly loss will be over 10000 million yuan. On the one hand, the coal price remains high, on the other hand, the price of electricity is controlled by the government. So, it is difficult for power plants to have a balance. Thus, some power plants would rather generate less electricity. On the other hand, achieving the completion of industrial transformation requirements is urgent. China has to eliminate backward production capacity and implement supply-side reform. To realize the dual-carbon target and environmental protection need, as well as another important aim which is to realize industrial transformation. This is to change from traditional energy-cost production to emerging energy-saving production. In recent years, China has been working to reach this goal. But from last year, due to the epidemic, the demand and task of high energy-consuming products under high have increased. With the epidemic raging and global manufacturing stalled, large manufacturing orders are returning to the mainland. This leads to high consumption of power in the first 3 quarters of 2021. Also, the price of raw materials, which price is dominated by international capital has soared in 2021 leading to a high production cost. In addition, for domestic and global environmental protection, China will need efficient production capacity in the future. To reduce the energy consumption and carbon emissions of traditional industries, large-scale technological innovation and device transformation are needed. Thus, in short term, achieving the dual control goal, power, and production limit is a way for traditional industries to achieve the goal. In addition, the inflation risks can be prevented tons a certain degree with the high soaring global price of iron, copper, oil, grain, and beans.

 

The Chinese government has been working hard for dual control of energy consumption for environmental protection. Due to the orders back to China from the inning of 2021, the busy production has totaled a high-power consumption which is out of the excitation. After the review for the first 3 quarters, the energy consumption in many provinces is much higher. The consumption for the last 3 quarters already reaches the amount for the whole year.   The main energy-consuming projects are mainly in six industries, including petrochemical, coal power, chemical, steel, and non-ferrous metal smelting building materials. With the over-consumed energy and power, many provinces have adopted the production and power limit policy and these lead to the enterprises feeling unprepared.

 

What is the effect on the different industries?

 

With the background of sudden power and production limit from provincial governments, the chemical industry index has a sharp rise, different chemical raw materials have soared in price, and many related stock-listed companies also have the daily raising limit frequently. According to the Business agency, the chemical index was 1137 on September 1 and 1262 on September 30. This is a record high in the cycle.  Compared with the lowest point of 598 points on Apri08, 202020, the index has risen by 111.04%. (Note: Period to 2011-12-01 till)

 

The new high price in the chemical industry is mainly due to the dual control and power restriction policy. As there are 9 provinces and autonomous regions whose energy consumption was much up in the first 3 quarter year on year! And another 10 provinces’ energy consumption reduction rate cannot meet the requirements. This means the target of dual control is not reached in the first half year. So, every province has the heavy task to take new measures to ensure the realization of the whole year’s target.

In 2020, due to COVID-19, global economic activities have been greatly affected. the poor demand leads to the low prices of crude oil and bulk chemicals downstream. While in 2021, with the gradual control of the epidemic and recovery of global business, education has recovered much, and demand also increase. As per the monitoring industry data of the business agency, it can be seen that the price of many chemical sub-industries has increased in 2021, and some are up by more than 100% year on year.

 

As per the data, the price of 79 kinds of products in the chemical sector increased on September 2 with 021, 57 of them increasing more than 5%. the top three commodities with price increases were phosphate (161.44%), yellow phosphorus (108.70%,) and caustic soda (90.00%).

There were 18 products with price declines, and 6 products down by more than 5%. The top 3 declines were butadiene (-33.32%), butanol (industrial grade) (-33.62%), and Iso octanol (-30.90%).

 

Product Industry Early Sep., price Late Sep., price Unit Monthly increase or decrease
Phosphoric acid Chemical 1195.3125 3125 USD/MT 161.44%
Yellow Phosphorus Chemical 4492.1875 9375 USD/MT 108.70%
Caustic Soda Chemical 101.5625 192.96875 USD/MT 90%
DMC(Silicone) Chemical 5859.375 9890.625 USD/MT 68.80%
R134A Chemical 3489.53125 5755.15625 USD/MT 64.93%
Silicone Adjuvant Chemical 5300 8700 USD/MT 64.15%
Acetic anhydride Chemical 1507.8125 2335.9375 USD/MT 54.92%
Epichlorohydrin Chemical 2260.3125 3317.65625 USD/MT 46.77%
Acrylic Acid Chemical 2307.1875 2869.6875 USD/MT 24.36%
Propylene Glycol Chemical 2666.5625 3296.875 USD/MT 23.63%
Rutile Titanium Dioxide Chemical 3050 3200 USD/MT 4.92%

 

In September, the price of phosphorus chemical price has reached a ten-year high. Except the phosphorus ammonium market remains stable at a high price, phosphate and phosphate ore have a sharp increase after yellow phosphorus. Under the dual control policy, yellow phosphorus-related enterprises have serious limits in electricity and production capacity, thus the tight market supply situation cannot be changed in a short time. But till the end of September, most phosphorus chemical products have risen to a high level. Downstream enterprises need to be more cautious for take in new raw materials. In general, there could be a certain pullback in the phosphorus chemical, but in a short time, it may remain at a high price.

 

Besides phosphorous chemicals, the acetic acid industry also has a big increase in September. The price of acetate products rose by 47.69%. Its upstream raw material methanol has increased by 37.86%. And downstream acetic anhydride by 54.92%, EVA increased by 38.82%, ethyl acetate by 25.23%, and PTA by 3.49%. Affected by the dual control policy, many acetic acid industry chain enterprises have stopped production and price has increased much. After the China National Holiday, with the production recovery in October, the supply and demand of the acetate industry chain have been eased. According to the statistics of the production plan of the acetic industry, the supply growth in October is expected to be more than the growth of demand, and the price of the acetate industry is expected to drop some in October.

 

In addition, the price of the Chlor-alkali sector in the chemical industry has also increased, with caustic soda rising by 90% in September, calcium carbide by 39.45%, PVC by 34.45%, and soda by 34.05%. With the dual control policy, the production capacity of the chlorine-alkali industry in October is expected to be relatively low. With the relatively tight supply and the high price of raw materials, it is expected that the prices of soda, caustic soda, and baking soda would be stable at a high level. The actual situation will be depended on the demand.

 

Besides the basic chemical, chemical products such as organic pigments (Pigment Red 122, Pigment Violet 19, Pigment Yellow 74, Pigment Yellow 12), Anatase titanium Dioxide, Silicone leveling agents, Dimethicone, and optical brighteners all have price increases at different ranges.

 

The recent large-scale power restriction would have a big impact on the manufacturing industry, and long-term environmental protection policies still exist, the price rise of commodity prices will be transmitted downstream, which will squeeze the profit and living space of the downstream enterprise. In addition, the control of the high energy consumption industry is a long-term trend, so the short-term policy will only affect the production limit time and the trend for energy saving will not be changed. Therefore, with the inflation risk in the fourth quarter, the traditionally high-demanded months will lead to a further price increase of chemical products. in the background of a global energy shortage, product prices have e rising trend, but the height of the chemical market would be subject to the demand situation.

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